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Abolishing the Tax-Free Threshold in Australia: Simulating Alternative Reforms

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  • John Creedy
  • Nicolas Hérault
  • Guyonne Kalb

Abstract

This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a tax and benefit system with benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. Four alternative policy changes, each involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality, were examined using the Melbourne Institute Tax and Transfer Simulator. A range of implications were examined, including labour supply responses to tax changes, and the effects of policy changes on inequality and social welfare. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that it is impossible to improve labour supply incentives at the same time. In order to achieve improved incentives, either revenue or distribution neutrality has to be sacrificed.
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Suggested Citation

  • John Creedy & Nicolas Hérault & Guyonne Kalb, 2009. "Abolishing the Tax-Free Threshold in Australia: Simulating Alternative Reforms," Fiscal Studies, Institute for Fiscal Studies, vol. 30(2), pages 219-246, June.
    • Handle: RePEc:ifs:fistud:v:30:y:2009:i:2:p:219-246
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    Cited by:

    1. Rachel Ong & Gavin Wood & Melek Cigdem, 2013. "Work incentives and decisions to remain in paid work in Australia," Bankwest Curtin Economics Centre Working Paper series WP1312, Bankwest Curtin Economics Centre (BCEC), Curtin Business School.
    2. Michal Horváth & Zuzana Siebertová, 2019. "Employment Effects of Income Tax Reforms: Lessons from Slovakia," Discussion Papers 54, Central European Labour Studies Institute (CELSI).

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